Is Datadog (NASDAQ:DDOG) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Datadog, Inc. (NASDAQ:DDOG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Datadog

What Is Datadog's Debt?

As you can see below, Datadog had US$744.9m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$3.20b in cash offsetting this, leading to net cash of US$2.45b.

A Look At Datadog's Liabilities

We can see from the most recent balance sheet that Datadog had liabilities of US$1.78b falling due within a year, and liabilities of US$222.1m due beyond that. On the other hand, it had cash of US$3.20b and US$487.1m worth of receivables due within a year. So it can boast US$1.68b more liquid assets than total liabilities.

This surplus suggests that Datadog has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Datadog boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Datadog turned things around in the last 12 months, delivering and EBIT of US$73m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Datadog's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Datadog has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Datadog actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Datadog has net cash of US$2.45b, as well as more liquid assets than liabilities. The cherry on top was that in converted 1,013% of that EBIT to free cash flow, bringing in US$735m. So we don't think Datadog's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Datadog you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.